Wednesday, February 12, 2014

Non-Compete Clauses Under the Oman Civil Code

In today’s environment, we very often come across employment contracts with non-compete clauses as a mechanism to protect an employer’s business interests from unfair exploitation by former employees. Whilst non-compete covenants are acceptable in most Western jurisdictions, they have historically been regarded less enthusiastically by the Omani Courts and have not always been upheld.

However, the Omani legislature has recently acknowledged non-compete clauses as acceptable, provided that certain conditions are met.

Prior to the enactment of the Omani Civil Code (“Civil Code”) in August 2013, non-compete clauses were governed (albeit indirectly) by Article 50 of the Law of Commerce (“Commercial Code”), promulgated by Royal Decree 55/1990.

Article 50 of the Commercial Code provides:

“It shall not be permissible for a merchant to induce workers or employees of another merchant to assist him in drawing away the clientele of such merchant, or to leave the service of such merchant and enter his service and impart to him the secrets of his competitor. Such acts shall be deemed unlawful competition warranting compensation.”

Whilst the Commercial Code did not provide specific instructions as regards the acceptable scope of a non-compete clause, it did provide a reasonable basis for the employer to justify its inclusion of a non-compete clause in its employment contracts.

However, Article 661 of the Civil Code states:

“If the work of the employee is such as to permit him to have access to work secrets or to make acquaintance with the customers of the business, it shall be permissible for both parties to agree that it shall not be permissible for the employee to compete with the employer or to engage in an employment which competes with him after the termination of the contract. [P]rovided that such agreement shall not be valid unless it is limited in time, place and type of work to such extent as may be necessary to protect the lawful interests of the employer.”

As per Article 661, one of two conditions must be met in order for a non-compete clause to be applicable and thereby valid. An employee must have access to a company’s (i) “work secrets” and/or (ii) have developed a viable relationship with the employer’s clientele. If one of the above two conditions is present, the parties may agree that the employee will not “compete” with the employer, such as not working for a competitor within the same geographical region.

Article 661 provides two key limitations as regards the ‘scope’ of an acceptable non-compete clause. First, the clause may only be effective for a limited duration. Judicial precedent has yet been established as regards what amounts to a ‘reasonable’ time; however, the acceptable duration will likely vary based on the relevant industry and level of technical expertise.

Second, Article 661 provides that a former employee may only be restricted from competing within a certain geographical scope. Whilst this provision is certainly ambiguous, one main factor to consider is location of the company’s client base (i.e., GCC or Oman), and in what region could a former employee adversely impact the company’s business prospects due to his ‘insider’ knowledge and personal connections.